Most estimates of a company’s value are based on historical financial results and forecasts. Our human inability to predict the future is the major factor affecting the accuracy of forecasts, but causality can improve the accuracy of these predictions.
Fund managers and the companies analysts are researching want positive research. Since analysts work for fund managers, this can cause over-optimistic valuations.
“Whenever you put out a sell notice you incur the wrath of people who own the stock already as well as the company itself,” says Candace Browning, deputy director of research at Merrill Lynch. Consequently, 55% of research notes advise clients to buy shares and only 8% recommend selling.
Another reason for inaccuracy is the fact that most of the value contained in a company’s market capitalisation cannot be calculated from its physical assets.
Through its identification of the non-financial and intangible drivers of financial success, the Perendie platform® improves the accuracy of forecasts and valuations.